Developed lots still in short supply

A deficit in developed lots continues to restrict the construction of mid-range homes and rising development costs preclude the construction of entry-level homes, according to a first-quarter 2016 report by Metrostudy.

“The fundamentals for a strong housing market – employment and population growth – have been present for a while, but the lost capacity was, and still is to some extent, the biggest governor on the pace of gains,” said Jay Colvin, director of Metrostudy’s Charlotte region. However, he said, “2016 looks to be the year when these negative factors fade.”

Housing starts between January and March were up 4.4 percent compared with the first quarter of 2015 and were up 12.3 percent for the 12 months ending in March compared with the year ending in March 2015. Construction began on 2,243 homes in the first quarter, and on 10,530 homes over the 12 months ending in March.

New-home closings for the quarter totaled 2,176, up 7.5 percent from first quarter 2015. For the year ending in March, closings were at 9,839, up 8.6 percent over the previous 12-month period.

Metrostudy’s findings were seconded by a recent report from Market Opportunity Research Enterprises, which found that first-quarter closings on new condos, single-family homes, and townhomes rose 6.2 percent in the eight-county region of Cabarrus, Iredell, Mecklenburg, Union, York, Gaston, Lincoln, and Lancaster counties.

“All in all, our outlook on 2016 is positive,” said Carl Van Horn, a research analyst at the Rocky Mount-based company. He attributes the growth in new-home sales to the recovering economy and the fact that the country faces a presidential election in November.

“If you follow history, we should be coming into a peak market that tends to follow election cycles,” Van Horn said. “Nothing really bad happens during these times,” because, he said, politicians are adverse to promoting policies that would endanger consumer confidence.

Van Horn said an increase in the number of permits pulled by developers is indicative of the health of the market. There were 2,856 building permits issued on condos, single-family residences and townhomes in the first quarter, up more than 4.3 percent from 2,737 a year earlier.

Metrostudy reported that homes priced in the mid-tier range, $250,000 to $349,999, have experienced the greatest demand – and resulting lowest inventory of developed lots. Starts were up 31.7 percent compared with the first quarter of 2015; closings were up 41 percent; and lot supply fell to a 19.9-months’ supply.

That’s well below the 30-month supply considered to be a market in equilibrium.

Among higher-priced homes, there was a net gain in lot inventory year over year.

“The new home market is shifting from supply-constrained to supply-neutral. This shift is a good sign for builders whose growth has been inhibited due to slow lot development, but is also a time to be somewhat cautious as the barriers to entry decline, and therefore the competitive supply for the midtier and upper price points will be more present in the market moving forward.”

“This underscores how the market’s focus on the mid-tier price points has produced adequate supply in order to meet demand and grow the business. Now that the mid-tier market has stabilized, growth will need to come from other buyer segments,” said the report. “Metrostudy believes the greatest opportunity for growth in the market continues to be the large pool of price sensitive buyers who have yet to be addressed in volume.”

So far, however, the construction of homes in this range has been “prohibitive,” the report said.

The supply of developed lots for homes priced below $200,000 declined 30 percent, due to a decline in the supply of discounted finished lots and increasing costs for entitled land and newly developed lots. Lots for homes in the $150,000 to $199,000 range declined to a 4.9-months’ supply.

Van Horn echoed Metrostudy’s findings that rising land costs were contributing to a dearth in newly constructed, less expensive homes.

“Developers can’t deliver finished lots that allow builders to construct in these lower price ranges,” he said. Van Horn said builders prefer to keep the cost of a lot at or below 20 percent of home prices, a figure that allows them to cover sales and marketing costs and maintain a profit margin.

“In the Charlotte market, it’s more difficult to find desirable lots that are below $50,000,” he said, meaning builders must either price their homes above $250,000 or find less expensive land in the suburbs.

“It’s all about the ability to make a profit,” he said.

The average price of a newly built single-family home, he said, increased to $317,045 in the first quarter from $291,575 a year ago. The number of new single-family closings grew nearly 6 percent in the same period.

Increasing construction costs also have restricted the supply of lower-tier new homes.

While lots for townhomes increased 126 percent in the 12 months ending in March compared with a year earlier, they are still running about 29 percent below the current pace of demand, the Metrostudy report said. The number of townhomes under construction in the first quarter, 586, was up 38 percent from first quarter 2015.

The average price on a new townhome fell slightly to $193,351 in the first quarter from $193,885 a year ago, according to Market Opportunity Research data. Closings declined nearly 15 percent in the same period.